HM Treasury to Review Ring-Fencing and Proprietary Trading in UK Banks

HM Treasury has published its terms of reference for a review of the operation of ring-fencing legislation and banks' proprietary trading activities in the U.K. The Treasury is required to conduct each review under the Financial Services (Banking Reform) Act 2013. The FS(BR)A introduced reforms based on recommendations made by the Independent Commission on Banking that was established in the wake of the 2008 financial crisis. The U.K. ring-fencing laws require U.K. banks which hold more than £25 billion in core deposits and banking groups whose members hold an average core deposit of more than £25 billion to separate their core retail banking business from their investment banking business. Restrictions limit the products that a ring-fenced bank can offer and where it can conduct business. Restrictions on proprietary trading (being the trading of financial instruments or commodities as principal by banks or investment firms) were introduced for ring-fenced retail banks and came into force in January 2019. The U.K. decided not to impose a complete ban on proprietary trading for all banks, as had been seen in other countries, such as the U.S. under the Volcker Rule. Among the purposes of this legislation is an attempt to limit taxpayer liability for bank bail-outs in future financial crises.

The review of ring-fencing legislation will consider the impact of legislation on: (i) competition in the banking sector; (ii) competition in the U.K. mortgage market; (iii) internal U.K. banking sector competitiveness; and (iv) the provision of finance and financial services to the economy. It will also consider the need for clarification and any unintended consequences of the legislation.

The review of proprietary trading should cover proprietary trading engaged in by "relevant authorized persons" (i.e. U.K. institutions that have permission to conduct the regulated activities of either accepting deposits or dealing in investments as principal where it is a PRA-regulated activity). The PRA's report on proprietary trading will be reviewed, and assessment will be made of how well proprietary trading risks are mitigated and any consequences arising from the evolution of proprietary trading. The PRA reported in September 2021 that further restrictions on proprietary trading should not be imposed and that certain policy measures that are currently being implemented, for instance the fundamental review of the trading book, would improve the treatment of some proprietary trading risks in banks.

The panel is expected to finalize its reports within one year of beginning the reviews.

View the terms of reference for HM Treasury's reviews.

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